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Why would Merrill Lynch wish to dispose of its money management business? Under the direction of Stan OâNeal, its no-nonsense chairman and chief executive, Merrill has been turned on a sixpence and transformed into one of the most profitable companies in the financial services industry.

Ian Kerr

“Mother Merrill” has been packed off to a retirement home in Scottsdale, Arizona, and a number of other sacred cows laid to rest. If Charlie Merrill and friends who formed Merrill Lynch Pierce Fenner & Smith were alive today, they would probably not recognise the firm.

However, is asset management another sacred cow that needs to be led away to the abattoir? It is true that the purchase of Mercury Asset Management has never quite been the success that David Komansky, the former chairman, had hoped. But neither has it been a total lemon.

Merrill wanted Mercury Asset Management so badly that it ended up paying over the odds
. Then it compounded the problem by imposing its own management style and brand name on a business that was famous for its independence.

In the US, Merrill ran into similar problems when it bought Hotchkiss & Wiley. The result was that performance suffered and some big clients walked away.

However, wasn’t it also true that Merrill prided itself on its asset-gathering ability? When the total value of securities held in Merrill’s client accounts first approached $1 trillion, I remember being told by senior management that the aim was to generate sufficient fee income from this huge asset pool to cover the basic operating costs of the entire firm. Any additional income from sectors such as trading and investment banking would be icing on the cake.

Today, Merrill has more than $1.5 trillion in its client accounts and is one of the world’s largest fund managers. Not only are these profitable businesses, but the order flows they provide also provide valuable information to Merrill’s traders.

The one possible reason for selling a healthy money management business is that with pesky regulators looking through every keyhole and under every bed, the business has become too hot to handle. But would this really be too much of a headache for Merrill Lynch, which is reputed to have one of the best compliance departments in the industry and a leader in O’Neal who will ensure that employees and customers play by the rule book?

While no one doubts O’Neal’s ability to surprise the market or to chart his own course, the sale of all or part of the investment management business would be in sharp contrast to the expansion ambitions and strategy of many Merrill Lynch competitors. One of the few criticisms that could be directed at Goldman Sachs in the past was its flaccid asset management division but, perhaps not surprisingly, Goldman has improved and is continuing to improve. Fund management was a big weakness in Lehman’s armour, until it acquired Neuberger-Berman.

My friends at Lehman confirm that this purchase has been a success. If only Cazenove in the UK had used its highly respected brand-name to build a serious fund management business catering for the super-rich, the firm would not have a puny market capitalisation of around £1bn.

O’Neal may believe that every asset has its price and that the time is ripe for a sale. Certainly, there would be no shortage of bids from houses that have watched the example of UBS, which has become a cash cow thanks to one of the largest asset management businesses in the world.

HSBC didn’t buy Bank of Bermuda for its loan portfolio but for its wealthy clients who have their personal fortunes managed by the bank. In the less memorable days of Matt Barrett’s reign at Barclays, Barclays Global Investors was very nearly sold on the basis that it was a non-mainstream business.

That view always appeared to be slightly cock-eyed to most market observers, whose only criticism of BGI was that it wasn’t nearly as profitable as it should have been. Thankfully, Barclays changed its mind, installed a new management team and BGI is now a valuable and productive asset.

Perhaps O’Neal has a hidden agenda for Merrill Lynch? The gossip on the market grapevine may be so much hot air but the rumours that Merrill is being dressed up for sale just won’t die down. At the beach club in Sotogrande last week a prominent Spanish lawyer even asked me if Merrill was about to be placed on the auction block, and should he be buying some stock?

My response was that every share price tells a story and that Merrill shares probably wouldn’t be more than 15% below their high if the company was about to be sold. However, with Neal in charge, Merrill could easily make a decisive move in any direction.

Selling a division that is the envy of most competitors outside the UBS or Citigroup league would seem to be counterproductive to several market observers. A hedge fund manager based in Monte Carlo, who actively trades Merrill shares and recently bought the stock again at $55, said: “It would be rather like having a leg amputated just because it was starting to itch. Even if he received more than $6.5bn, how would O’Neal redeploy those funds more effectively in the best interests of Merrill’s shareholders and employees?”

Does O’Neal believe that the increased attention of the regulators could create a conflict of interest within Merrill itself? What does the bank’s once all-powerful sales force think? They are used to selling Merrill products and many customers are perfectly happy to buy mutual funds managed by Merrill.

What about the research analysts, who have been separated from their investment banking colleagues and may face the prospects of having their relationships with their in-house fund managers severed?

Would Merrill’s legendary reputation for distribution be diminished if the fund management divisions are sold? For Merrill watchers and shareholders, this promises to be an interesting summer.